Every project in Miami is now a branded residence. This is not exactly true. But it's mostly true. What I heard over the last two days at Elevate is that Miami is the second most active city in the world when it comes to branded residences (after Dubai).
So much so that when a developer sits down with a prospective sales team, one of the first questions they will ask is, "cool, so what's the brand?" Is it Elle? Dolce & Gabbana? Or Pagani? You need a brand. And on average, the end pricing premium is somewhere between 20-30%, in exchange for paying a 3-5% licensing fee (on total revenue).
This makes sense. Brands have value. And I agree with Daniel Langer -- who presented at the conference -- that there is "added luxury value" when it comes to brands that are truly premium and luxury. It's the only way to explain why certain goods & services command a premium. Consumers don't generally pay more for something for the hell of it. They pay more because they believe that they are getting more value.
One interesting example that Daniel gave is a research study involving two groups of people looking at basically the same photo of a woman getting of a car. The only difference is that in the first photo, she is getting out of a Volkswagen, and in the second photo, she is getting out of some fancy car. I can't remember which one, but just know that it's fancy and expensive.
Now, the two groups had no idea this was a study related to "luxury" and they had no idea there was another group and photo, but when comparing the results, the differences were measurable. The fancy car improved perception of the woman in virtually every dimension: she was thought to be more competent, intelligent, attractive, and the list goes on. This is interesting. It demonstrates that brands matter.
So again, it's no surprise that developers are "borrowing" hotel, fashion, car, and many other brands to strengthen the perceived value of their projects. It makes economic sense. But at the same time, I think there are different ways to go about this and I worry about the long-term value and resiliency of some of these branded projects.
For example, in some cases, the brand just seems like a superficial add-on to an otherwise banal project. And in these situations, it may work out for the developer in the short term, but at some point, people will come to the realization that there isn't actually anything differentiated.
To do it well, you want the brand to permeate the project and you need it to survive after completion. This is why hotel brands are a natural fit and what started this category -- they have property brand standards and they are typically there after construction is complete and the building is operational.
There's also the peculiarity that in, adopting a branded residence approach, the developer is by default relegating their own brand to a backseat position. And so there are developers, including one panelist at this conference, who flat out reject this approach -- they want to manage, control, and grow their own brand, not somebody else's.
This is a reasonable approach, but it's a longer game. Brand equity isn't built overnight; it takes time and consistency. Not every developer has the benefit of being in this position, or maybe they don't care to be. They want to remain entrepreneurial and nimble and just tool up on a project-specific basis.
So I guess the answer to the question of whether to brand or not is that it depends on your approach and on how you execute. But regardless, know that this is a massive business and that Miami is one of the branded residence capitals of the world. In the most desirable submarkets, it certainly feels a lot like table stakes.
Today I have two things to share.
One, I'm not very good at following proper protocols during council meetings. You know, where you're supposed to direct communication via the chair person and say things like, "Through you, Mr./Madam Chair." I will work on improving this.
Two, I'm thrilled to report that, last evening, the proposed zoning and Official Plan amendments for Project Bench were approved by the Town of Lincoln Councillors in an 8-1 vote. This is following the positive planning staff report that I wrote about last month. Once again, this is an important milestone for the project and we're excited for the next steps.
At the same time, we recognize that change can be difficult. And this development represents change for the community. Three people from the community spoke last night in opposition of the project.
I spoke to one of them after the meeting and he was very respectful and said, "congratulations." But he also went on to say, "I hope that you and the team will continue to work with the community as you have been doing." My response was, "absolutely we will."
Onward.
Update: Just to be clearer on the planning process details, last night was the Town of Lincoln's Committee of the Whole meeting. The Committee of the Whole has three areas of focus: community services & infrastructure, general business & finance, and planning & economic development. All Town of Lincoln Councillors, including the mayor, voted on the project at this meeting. The next step is for the Committee's recommendation to go to Council for final approval, and this meeting is scheduled for December 16, 2024. Following this, a formal Notice of Decision will be issued.
In years past, it was relatively simple for Toronto condominium developers to underwrite pre-construction sales (which, as most of you know, is a requirement for construction financing). Notwithstanding the temporary blips, like at the start of the pandemic, it was easy to feel generally confident that the sales would be there when you needed them. It was just a question of 1) pricing and 2) how quickly could you get there (i.e. get through the zoning and entitlement process).
This is not the case today. And it's happening in many (most?) markets, not just Toronto.
Today, the market clearing price for new condominiums is below the cost of actually building them. So no developer knows what the pricing should be, because no developer can price there and still have a feasible project. In addition, the question of timing is no longer dependent on approval timelines (though please don't take this to mean that approval timelines don't impact projects). At this point in the cycle, there are lots of zoned sites available. The question is now: When will the pre-construction condo market return?
It is impossible to know the answer to this. If you have a truly differentiated product catering to a specific buyer pool, then it is possible the answer could still be today. But if you look at the number of condominium suites under construction in the region (more than 85k) and the number of suites expected to finish construction this year (around 27k the last time I checked), most people are broadly assuming the answer is, at the very least, a few years from now.
Not surprisingly, this is having a meaningful impact on high-density land values. If you don't know when and for how much you can sell for at the back end, then it's pretty challenging to run a residual land value model today. Because it's a lot harder to have conviction in your assumptions. What this also means is that, if your assumption is the market will take years to return, then you need to add in this additional cost of time into your model.
To provide an indicative example, let's say that you're buying land today for $75 per buildable square foot, but that you don't anticipate being able to launch condominium sales for a few years. The result could be that once you add in interest charges and other carry on the land, your effective land basis could end up being somewhere closer to $125 pbsf. (Again, these are just indicative numbers.) The end result is that you have to pay that much less today.
In today's market, you need to have the flexibility of patience. So this is one of the ways that developers are thinking about new acquisitions, assuming they're still active. And it represents a significant discount on land (>50% in many cases) compared to where we were a few years ago.